virgin money uk plc - 2020 interim financial results presentation · 2020. 3. 30. · btl - i/o,...
TRANSCRIPT
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03
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07
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33
Chairman’s Introduction
Overview
Balance Sheet Strength
Financial Results
Conclusion
Q&A
3
Chairman’s Introduction
Chairman
DAVID BENNETT
4
Overview
Chief Executive Officer
DAVID DUFFY
4
5
Supporting our Customers, Colleagues & Communities while protecting the Bank
Proactive contact and advice to
support customers in uncertain times
c.60k mortgage and c.40k personal
payment holidays granted to date
Protecting
our Bank
Supporting
Customers,
Colleagues &
Communities
Resilient H1 performance; Underlying
PBT of £120m; Stat PAT of £22m
Ongoing strategic delivery: launched
VM PCA; Digital Disruption hub in place
c.4.5k Business support facilities
granted; c.£135m of CBILS approved
Experienced Relationship Managers
proactively supporting businesses
Resilient CET1 of 13.0%; significant
management buffer c.£800m
Prudent liquidity LCR 139%; no
wholesale funding required for 9-12m
>95% of store network remains open
c.6k colleagues working from home
VM Foundation donating >£850k to local
charities; VMG platform fee waived
Defensive portfolio: 82% mortgages,
11% business, 7% unsecured
Low exposure to more impacted
SMEs; Prime credit card portfolio
All customer support and operational data as at 30th April
6
Resilient H1 financial performance as we execute strategy
• Business lending +5.7%, Personal lending +6.2%; Mortgages (0.9)%
• Relationship deposits +4.3%
• NIM of 1.62% in line with guidance
• H1 costs of £465m (down 3% yoy); underlying cost:income ratio of 57%
• £76m of transformation net run-rate cost savings achieved to date
• Cost of risk of 23bps prior to COVID impact
• COVID impairment provision of £164m
• Considerable on balance sheet provision reserves of £542m
• £127m of exceptional costs; Integration and restructuring cost of £61m
and acquisition accounting unwind of £57m
• PPI complaint uphold rate tracking much lower than provision
assumption; no further PPI or legacy conduct provisions
Underlying profit
before tax
£120m
Statutory profit
after tax
£22m
Underlying
RoTE
4.6%
CET1
ratio
13.0%
Efficiency
Asset
quality
Balance
sheet mix
optimisation
Exceptional
costs
Balance Sheet Strength
Chief Financial Officer
IAN SMITH
7
8
£73bn loan book primarily secured residential mortgages
Mortgages82%
Business11%
Personal7%
With resilient portfolio-level asset quality attributes
Defensive loan book underpins asset quality
Mortgages
£59.5bn,
82%
Personal
£5.3bn,
7%
Business
£8.3bn,
11%
• 76% owner-occupied with prudent BTL book
• Average LTV 57%, only 17% is >75% LTV
• Low arrears 0.4% vs industry avg. of 0.7%1
• Majority of book underwritten under MMR rules
• <0.1% concentration in high LTI & high LTV
• Prime portfolios, rigorous underwriting standards
• £4.2bn cards; £1.1bn personal loans
• Focused on high-quality, more affluent customers
• Credit card arrears: 1.2% (industry: 2.3%2)
• Personal loan arrears: 0.7% >90 DPD
• Prudent and consistent risk appetite
• Defensive sector and business size mix
• 66% fully or partially collateralised
• Stable low arrears of 0.5% >90 DPD
• Portfolio PD has also been stable for 3 years
1 3m+ arrears; Source: UK Finance2 2 cycles past due, Source: Argus. Industry comparators sourced from Argus covering
c.90-95% of the UK cards market and verified vs. UK Finance published figures
9
Comprehensive Government income
support schemes across employees and
self-employed
A prime book, originated under the highest standards
• Consistent, prudent underwriting; no sub-prime or self-cert
• Book built since UK mortgage market review raised standards
• Arrears are lower than industry (0.4% vs 0.71%)
Owner-occupied (76%)
• Average LTV is 57.5%; only 3% is >90% LTV
• Average LTI c.3.0x; only 6% >4.5x LTI
Buy-to-let (24%)
• Average LTV is 55.6%; max LTV of 80%
• Conservative rental and borrower income requirements
OO - C/I, 62%
Ave LTV: 60%
OO - I/O, 14%
Ave LTV: 50%
BTL - I/O, 21%
Ave LTV: 57%
BTL - C/I, 3%
Ave LTV: 47%
Low LTV mortgage book weighted towards owner-occupied Virgin Money and Government initiatives to support customers
Mortgages: prudent, low LTV book
34%
49%
17%
<50% LTV
50%-75%
LTV
>75% LTV
57% Average LTV
c.60k mortgage payment holidays
granted; c.15% of mortgage
customers
Digital payment holiday request service
launched to accelerate support to
customers
“Money On Your Mind” digital
advice service launched to support
customers
1 3m+ arrears; Source: UK Finance All customer support numbers as at 30th April
Total Book LTVs
10
50%
10%15%
25%
Micro /
smaller
SMEs
Least exposed55%
Lower-impacted22%
More exposed
14%
Higher impacted
9%
Loan book weighted towards firms with stronger cashflows With significant government and VMUK support in place
Business: diverse customer portfolio benefitting from support
• 35% of lending customers
• 96% of balances
• Turnover typically >£2m - £100m
• Average loan size c.£1m
• 65% of lending customers
• 4% of balances
• Turnover typically <£2m
• Average loan size c.£30k
Wage and income support
• 80% of salaries & trading
profits up to £2.5k p.m.
• Enables staff to be retained
for recovery
CBILS
• Loans up to £5m
• For businesses with
turnover <=£45m
Government support
Cash grants
• Up to £25k
• Supports very small
businesses
Tax and rate deferrals
• Rates cancellations
• Tax returns out to 2021
VMUK support
Payment holidays
• Pay only interest and
no capital for 3m
Maturing facilities
• RMs can give 6m
overdraft
extensions
Relationship
support
• Proactive RMs
• Delegated authority to
offer solutions
CBILS
• Guarantee 80% of losses
• Pay customers interest and
fees for 12m
In more
affected
sectors
Bounce Back / CLBILS
• Guaranteed loan support for
varying sizes of businesses
Bounce Back / CLBILS
• Committed to support
the schemes
Business
lending book
£8.3bn
55%
23%
13%
9%
Larger SMEs
/ mid-market
c.£8bn c.£0.3bn
11
Least exposed sectors £4.6bn (c.55% book) includes:
Business: defensive bias in our sector exposures
Agriculture,
Food and Drink
£1.7bn, 21%
Health & social
housing
£1.4bn, 17%
Specialist Hotels
and Real Estate
£0.7bn, 8%
• Includes cattle, dairy, arable, fishing
• Expected to be more resilient in this crisis
• Small migrant labour dependency
• High level of collateral
• Primarily care homes and social housing
• Care home revenues holding up; but
operational challenges at present
• High level of collateral
• Mainly high-quality, branded, city
centre hotels, high level of collateral
• Conservative CRE exposure
Retail Trade
£0.4bn, 4%
• Smaller retailers, not high street chains
• No single big name exposures
• Exposed due to small scale and sector risk
Business
Services
(sub set of)
£0.6bn, 8%
• Wide-ranging sector, but good access to
private equity and asset-backed lending
• Excludes Professional Practices (in least
exposed) and Computer & Tech (mid-impact)
More exposed sectors £1.1bn (c.14% book) includes:
Manufacturing
£0.6bn, 7%
• Very diverse customer base but with
material private equity penetration
• Have more flexible costs i.e. materials
Higher impacted sectors £0.8bn (c.9% book) includes:
Legacy Property
£0.2bn, 3%
• Legacy CRE remnants (conservative smaller
exposures); some specific accommodations
• Good level of security
Lower-impacted sectors £1.8bn (c.22% book) includes:
Other key sectors
£0.7bn, 9%
• Wholesalers, including grocery and
medical supplies
• Renewable energy and utilities
Entertainment
£0.1bn, 2%
• Diverse portfolio incl. radio, activity parks;
some have traded well in past downturns
• Includes legacy portfolio of hotels, pubs etc,
some traded well through previous cycles
Legacy Hospitality
£0.3bn, 3%
No meaningful exposure to airlines, oil and gas, travel,
high street retail or speculative development CRE
Note: Sector allocations represent management view of categorisation; portfolio view per ONS Standard Industrial Classification (SIC) codes is set out in the Appendix
12
Virgin Money and Government initiatives to support customers
Overdrafts19%, £0.7bn
RCFs23%, £0.8bn
Invoice Finance
12%
Asset Finance
8%BACs27%
Cards3%
Other8%
Outstanding credit lines have limited RWA or credit risk
Business: continuing to support our customers
Undrawn business lines c.£3.6bn; >50% unlikely to be utilised
• No sustained drawdown of undrawn facilities seen to date
• Undrawn RWAs on lines that are more likely to be used
are equivalent to c.70% of fully drawn RWAs
Significant
proportion of
available credit lines
are back-up and/or
transactional
facilities (e.g. BACS limits risk cover
3-day payment clearing
period)
Reduced risk of increased
limit utilisation due to
current trading
environment
Proactive support and advice from our
Relationship Managers with >10k
conversations already
Supported businesses with c.4.5k
lending facilities, overdrafts and capital
repayment holidays to date
c.£135m of CBILS lending support to
customers approved to date
Committed to supporting customers via
the Government’s Bounce Back and
CLBILS schemes also
All customer support numbers as at 30th April
13
• c.2.1m customers, largely former VM prime, more affluent book
• Targeted upper-end of mass market; no credit impaired/CCJs
• £3.9bn originated through VM brand, £0.3bn through CYBG
• c.80% of book originated since 2015 onto VM’s industry leading
credit underwriting; no down-selling – maintained discipline
• Low risk appetite reflected through conservative acquisition:
• Selective approach with high credit score cut-offs
• Customers with higher indebtedness are declined
• Stress tested on fully drawn line at stress rate (33.9% APR)
Credit card book (£4.2bn) is prudently built
Average customer age 42
Average income £43k
% homeowners 70%
% self-employed 10%
% debt to income 22% 31%
% persistent debt 3.1% 4.1%
Credit cards
customer profile
• c.130k direct personal loan customers; prime book
• Mix of existing PCA holders and quality, online customers from
recently launched digital proposition
• Strong bias towards lower-risk, older homeowners
• Emerging arrears on most recent vintages lower than prior years
• £0.1bn of loans through Salary Finance JV to employed
customers with payments deducted direct from salary:
• c.45% of loans to employees of FTSE 100 firms
• c.20% to employees of essential service providers (e.g. NHS)
Prime Personal loans portfolio (£1.1bn)
Personal: strong customer and credit profile
Industry
average2
VM1Personal loans
customer profile
Average customer age 46
Average income £39k
% homeowners 74%
% self-employed 5%
% debt to income 26%
VMUK3
1 Customers originated through VM brand since 2015; persistent debt reflects VMUK portfolio2 Sources: TUC and Argus
3 VMUK direct personal loans portfolio of c.£1.0bn
14
Key lessons from the experience of the last crisis…
0%
2%
4%
6%
8%
10%
12%
14%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
BT-Led
Non-BT-Led
2.6 (62%) 1.6 (38%)
Balance Transfer Retail
95% 93% 92% 93% 95%92%
79%81% 82% 83%
Pre-2016 2016 2017 2018 2019
Virgin Money brand Industry
…and how we have applied them in building a defensive book
Credit Cards: portfolio built using insight from the GFC
Management experience: informs portfolio construction Higher quality origination: via prudent underwriting standards
Building a BT-led book: with low arrears
• Origination and portfolio focused on lower risk BT customers
• Current arrears performance is 1.2%1 on the BT book
• Only 16% of promotional rate balances mature in next 6 months
% accounts in higher quality segments (with <2.5% expected unit loss rate) by acquisition year
BTs perform better: balance transfer cards see lower losses
Source: Argus
• Credit card management team has significant experience
in managing scale portfolios through an economic cycle
• A key learning from the last downturn is that the same
risk scoreband does not mean the same credit risk; less
affluent customers experience greater volatility
• As a result risk appetite is optimised for affluent segments
£bn
Industry % charge-off rate by credit card type 2007 to 2019
Source: Argus; Industry comparators covering c.90-95% of the UK cards market and
verified vs. UK Finance published figures
1 2 cycles past due
15
Cards portfolio has historically outperformed on arrears
2.11%2.10%2.17%
0.72%
0.78%
0.40%
0 6 12 18 24 30Industry 2016 Industry 2017 Industry 2018 Industry 2019 (early read)
VM 2016 VM 2017 VM 2018 VM 2019 (early read)
Virgin Money and Government initiatives to support customers
Personal: portfolio is well-positioned going into stress
A spike in unemployment will be the biggest driver of delinquency
• Job losses are highly correlated with delinquency on unsecured
credit, and will be the key indicator to watch for portfolio performance
• Affluent customers are more likely to have resources to draw on in
an unemployment event, but our portfolio will not be immune
% accounts 2+ cycles past due, by acquisition year, Industry vs Virgin Money brand
VM credit cards have outperformed industry delinquency rates
with VM customers significantly less likely to fall into arrears
Months
on book
Comprehensive Government income
support schemes across employees and
self-employed
c.32k credit card payment holidays
granted; <2% of cards customers
“Money On Your Mind” digital
advice service launched to support
customers
c.8k personal loan payment holidays
granted; c.6% of loan customers
Source: Argus; Industry comparators covering c.90-95% of the UK cards market and verified vs.
UK Finance published figures
All customer support numbers as at 30th April
16
Comprehensive three stage modelling approach…
1. IFRS9
model
scenario
probability
update
2. Expert
credit risk
judgement
overlays
applied
3. Pandemic
scenario
modelling in
business &
credit cards
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Q419 Q420 Q421 Q422 Q423 Q424
(10.0%)
(7.0%)
(4.0%)
(1.0%)
2.0%
5.0%
8.0%
2019 2020 2021 2022 2023 2024
Severe downside
…with prudent economic scenarios to inform provision
Conservative impairment approach given material uncertainties…
70
75
80
85
90
95
100
105
Q419 Q420 Q421 Q422 Q423 Q424
GDPAnnual change %
Unemployment% at quarter end
House price indexIndex at quarter end
Pandemic scenario9.7%
peak
c.30% peak
to trough
Source: Oxford Economics
• Re-weighted current IFRS9 models to
100% for existing multi-year “Severe
Downside” scenario
• Moderate GDP decline but slower and
longer recovery; average unemployment
of c.6% over 5 years
• Mortgage and Personal overlays reflect
estimated rates of migration from payment
holidays into credit losses
• Business overlays reflect customer-level
analysis incorporating specialist views &
sector stresses
• Additional modelling of a “Pandemic”
shock scenario for our largest at risk
portfolios: business & credit cards
• Embeds further economic overlays for
these portfolios with GDP decline of 10%
and peak unemployment of 9.7%
10%
trough
17
Considerable on-balance sheet provisions & coverage CET1 impact limited due to EEL offset and IFRS9 transitional
…determined a prudent £164m COVID provision
• COVID-19 impairment P&L charge of £146m has a
negligible impact on CET1 due to:
1. Excess Expected Loss (EEL) offset
o VMUK had a c.£90m regulatory EEL capital
deduction within CET1 that partly offsets the
post-tax P&L charge
2. IFRS9 transitional relief
o Remainder of post-tax P&L charge attracts
IFRS9 transitional relief currently at 85%
As at
30-Mar-20
Lending
Balances
Total Credit
Provisions
Coverage
Ratio
Business £8.3bn £261m 323bps
Personal £5.3bn £231m 440bps
Mortgages £59.5bn £50m 9bps
Total £73.2bn £542m 75bps
Business£110m
Personal£39m
Mortgages£15m
£164m
COVID
impairment
provision
Resilient capital position retained
CET1 ratio of 13.0%
18
• VM through-the-cycle book moves to hybrid
• CYB book IRB day-1 conservatism reduced
as evidenced through use and experience
Low risk of RWA migration near-term; with RWA opportunities
VMUK IRB regime means lower risk of stress migration Medium term - actions could deliver c. 5–10% RWA reduction
• No COVID-related RWA inflation observed to date; low risk
of significant inflation in FY20
• Personal books are on Standardised at 75%
• Business book is primarily on Foundation IRB
• Average RWA density of 73%
• Conservative regulatory LGD, experience based PD
• Risk weights less sensitive under stress than AIRB
• Mortgage books are on Advanced IRB
• Average RW density of 14% currently
• VM book is through the cycle; 180DPD
• CYB book is point in time + buffer; 90 DPD
• RWA inflation driven by customer arrears & defaults
(unemployment), HPI impact limited until >20% decline
Indicative RWA optimisation(pre-migration)
No material Basel III
finalisation impact expected
due to starting position
Credit
cards to
IRB
Business
methodology
updates
Mortgage
hybrid
models
No capital markets businesses so
negligible market and counterparty RWAs
• Enhanced processes and calculation
methodologies remove initial conservatism
• Reflects strong credit quality of the book
19
Significant CET1 buffer above regulatory requirement
4.5%
2.9%
2.5%
CRD IV minimumCET1 requirement
Mar-20
Management buffer Mar-20 CET1 ratio
c.£800m
CCB
c£600m
Pillar 2A
c£700m
Pillar 1
c£1,100m
13.0%
Holding a significant buffer heading into the downturn Significant capital resilience options available
9.9%
RWA optimisation represents a significant opportunity
• c.5-10% reduction in RWAs potentially available (prior to
any RWA migration)1
Balance sheet actions
• Prioritise capital for existing Business customer support
• Slower pace of unsecured growth in market
• Lower mortgage growth expectations
• Potential PPI provision surplus
Transformation and re-branding re-phasing
• Transformation – delay and re-phase near-term non-
mandatory actions to defer restructuring cost spend
• Re-branding – delay the re-launch of our refreshed Virgin
Money brand and all other re-branding activity to defer
marketing cost spend
20
Mainly deposit funded with a high quality liquid asset buffer… …no wholesale funding issuance required this year if needed
Prudent funding and liquidity position
9%
79%
11%1%
TFS
Customer Deposits
Wholesale Funding
Due to Other Banks
3691,569
5,628
1,679
< 3mth 3mth - 1yrs 1yrs - 5yrs 5yrs +
Debt Securities in Issue by Maturity (£m)
96%4%
Funding Mix by Product(%)
• Predominantly deposit funded, with a stable LDR of 113%
• Since 31 March deposit balances have increased as customers
have spent less under lockdown; unclear on duration of trend
• Additional liquidity held for Brexit and FSMA Part VII transfer
only partially released - LCR of 139% remains well ahead of all
internal and regulatory requirements
• HQLA is 58% cash, 10% gilts and 32% debt securities
• Existing TFS balance of £7.1bn to be fully refinanced with
TFSME
• No reliance on short-term Wholesale Funding
• Wholesale funding plan assumes 9-12 months of market
closure if necessary (no help from central bank funding
schemes assumed in this assessment)
Financial Results
Chief Financial Officer
IAN SMITH
21
22
£m 31 Mar 2020 31 Mar 2019 Vs H1 19 30 Sept 2019 Vs H2 19
Net interest income 702 728 (4)% 705 0%
Non-interest income 115 115 0% 91 26%
Total operating income 817 843 (3)% 796 3%
Total operating and administrative expenses (465) (480) 3% (467) 0%
Operating profit before impairment losses 352 363 (3)% 329 7%
Impairment losses on credit exposures (pre COVID-19) (86) (77) (12)% (76) (13)%
Impairment charge for COVID-19 (146) - - - -
Total impairments (232) (77) (201)% (76) (205)%
Underlying profit before tax 120 286 (58)% 253 (53)%
Net Interest Margin (NIM) 1.62% 1.71% (9)bps 1.61% 1bp
Cost of risk pre COVID-19 23bps21bps
(2)bps20bps
(3)bps
Cost of risk post COVID-19 63bps (42)bps (43)bps
Underlying cost-to-income ratio 57% 57% 0%pts 59% 2%pts
Underlying Return on Tangible Equity (ROTE) 4.6% 10.4% (5.8)%pts 11.2% (6.6)%pts
Underlying Earnings Per Share (EPS) 5.7p 13.4p (7.7)p 14.7p (9.0)p
Underlying P&L 6 months to Change
Resilient operating performance
6 months to 6 months toChange
23
£m 31 Mar 2020 31 Mar 20191 30 Sep 20191
Underlying profit before tax 120 286 253
Exceptional items (127) (277) (527)
- Integration and transformation costs (61) (45) (111)
- Acquisition accounting unwinds (57) (67) (20)
- Legacy conduct - (33) (400)
- Other items (9) (132)2 43
Statutory profit / (loss) before tax (7) 94 (274)
Tax credit 29 - 58
Statutory profit / (loss) after tax 22 94 (216)
Tangible Net Asset Value (TNAV) per share 252.5p 260.1p 249.2p
Statutory P&L 6 months to
Statutory profit after tax of £22m
6 months to6 months to
1 The comparative Statutory profit / (loss) after tax has been restated in line with the current period presentation. Refer to note 1.4 of the 2020 Interim Financial Report2 2019 H1 other items include acquisition related costs and accounting charges such as transaction costs £(55)m, EIR adjustments of £80m and intangible asset write-offs £(127)m3 2019 H2 other items include a £35m gain from ASI offset by £18m of consent solicitation fees and costs for participating in the RBS incentivised switching scheme4 Pro forma profit before/after tax for 6 months to 31 March 2019
24
Solid funding base; further relationship deposit growth
Growth in relationship deposits, mix well managed Retain funding flexibility and managing wholesale mix
Wholesale balances
£bn
7.3 7.1
9.6 9.2
1.60.4
Sep-19 Mar-20
18.5 16.8
Debt Securities TFS Other banks
Customer deposit balances
£bn
22.2 22.1
20.2 20.3
21.4 22.3
Sep-19 Mar-20
Term deposits Non-linked savings Relationship deposits
Cost1 (bps) 100 98
LDR 114% 113%
63.8 64.7
1.4%(9.9)%
4.3%
Cost1 (bps) 150 159
TFS (% of lending) 10% 10%
1 Reflects cost of funds during the six month period
25
Lending growth in line with strategy
Mortgages £59.5bn
60.1 59.6 59.5
Sep-19 Dec-19 Mar-20
7.98.1
8.3
Sep-19 Dec-19 Mar-20
5.05.2 5.3
Sep-19 Dec-19 Mar-20
(0.9)% 5.7% 6.2%
Continue to be selective in pricing
focusing on margin over volumes
Strong organic origination with
support from RBS switching
Continued growth in high quality
Virgin Money Credit Cards
Business £8.3bn Personal £5.3bn
26
H1 NIM in line with guidance; FY20 NIM impacted by rate cutMortgage yield reduction slowing; Personal yield higher
H1 20 NIM as guided; FY20 outlook impacted by rate cut
Average book yield
(bps)
262 253 248
H1 19 H2 19 H1 20
(5)
Mortgages
Business
Personal
417 417 408
H1 19 H2 19 H1 20
765 771 819
H1 19 H2 19 H1 20
(9)
48
NIM evolution
(bps)
Now expect FY20 NIM to be between 1.55%-1.60%
NII out-turn will be dependent on volumes
(4)6
1 (1)
Q4 19 MortgageLending
Business &PersonalLending
Deposits Wholesale& other
H1 20 Q1 20 Q2 20
1.60%1.63%
1.60%1.62%
27
…with underlying divisional fee income fairly resilient
(3)(12)
6
53 5246
40 37 39
106
7
15
8 1
16
H1 20 other income includes gain on gilts…
Non-interest income analysis
£m
• Sale of gilts at attractive market levels; proceeds reinvested
into other high-quality liquid assets
• Lower Personal income driven by HCCR overdraft fee changes
and lower credit cards fees
• Business income remained stable over the last three halves
underpinned by consistent account fees and customer interest
rate and FX risk management products
• Mortgage fee income stable with contribution from life, home
and insurance sales
• Investments fee income ceased to be recognised following
transfer to ASI JV; now receive net share of JV profit which
was negligible given still in start-up phase
H1 19
115
Mortgages
Business
Personal
Investments
Fair Value
H1 20
Non-interest income benefits from gain on sale of gilts
Gilt sales
H2 19
115
91
28
Transformation programmes continued to deliver net savings Re-phased initiatives and H2 cost delivery due to COVID impact
467
465
(30) +20
2019Costs
H1 20Costs
Originallyplanned cost-saving actions
Delayed costsavingsimpact
H2 20Costs
FY 20Costs
480 <455
Continued synergy delivery; future profile to be re-phased
(8)
60
1
12
27
20
24
18
3
3
Run-rate net cost savings to date of £76m
c.£40m
c.£60m
c.£45m
c.£15m
Net cost savings target c.£200m
Organisation design
Central costs
Operational efficiency
Network efficiency
Total gross
cost savings
Restructuring cost phasing – c.£360m over three years
by FY22
Digital and change c.£50m
Incremental Virgin
brand licence feec.£(10)m
c.£210m
£XX
947<920
£156m c.£140m c.£65m
FY19 H120 H220 and FY21
• H1 cost reduction benefitted from actions taken in FY19
• Original plan saw further initiatives taking FY20 costs to <£900m
• Delay to Transformation programme drives lower than planned
cost savings in H2
Previous
Re-phased £156m £61m c.£145m
H21
H1
1 H2 2019 includes Bank Levy of £5m
£m
FY19 H1 20
29
14 16 21 20 23
63
H1 18 H2 18 H1 19 H2 19 H1 20
Net Incl. Covid-19 charge
Pre-COVID divisional asset quality remained robust
Pre-COVID asset quality remained robust
Pre COVID-19 impairment was as expected
Net cost of risk
(bps)
Mortgages
£59.5bn at H1 20
Business
£8.3bn at H1 20
Personal
£5.3bn at H1 20
1 1 1 22
H1 18 H2 18 H1 19 H2 19 H1 20
37 3655 34
45
H1 18 H2 18 H1 19 H2 19 H1 20
226 280 317 361
300
H1 18 H2 18 H1 19 H2 19 H1 20
Gross cost of risk by division (COVID-19 impairment in grey)
(bps)
P&L
Charge £48m £58m £77m £76m £86m
COVID-19
charge £146m
6
298
420
Total
charge £232m
4
253
120
COVID
COVID
COVID
30
PPI processing uphold rates much lower than assumptions
Additional complaints
Initial IRs processing
Valid IR complaints
validation and
remediation
Sep-19 Utilisation Mar-20
c.100
c.175
c.110
379 161
PPI Provision
£m
Well provided: good progress made; spend trending below plan Uphold rate on processed complaints lower than assumed
158
60
218
Additional
complaints
IR processing
and operational
costs
IR complaint
validation and
remediation
Significant progress made on complaint and IR processing
• c.50k PPI complaints outstanding at Sep-19 all closed-out
• Only c.8k IRs of the initial c.325k IRs remain unprocessed
• Now expect c.100k complaints from IR population; slightly
higher IR-to-complaint conversion rate than assumed
• c.25k PPI complaints from IR conversions closed; c.75k remain
Complaint uphold rate much lower than provision assumption
• Complaint validity lower than expected over past 6 months
• Average uphold rate c.25% vs. provision assumption c.40%
• Average redress and cost-to-do broadly in line with assumptions
Run rate implies a potential provision surplus
• While current uphold run-rate suggests a provision surplus,
prudently maintaining existing assumptions until complete
• Previously expected to complete remaining cases by FY20, but
operations currently paused at minimal cost due to COVID-19
31
97 51
28 21
16 22
51 31
14
Sep-19 Underlyingpre-COVID
capitalgeneration
COVIDimpairment
charge(post-tax)
EEL offset andIFRS9
transitional relief
UnderlyingRWA growth
Mortgage modelRWA changes
AT1distributions
Integration andtransformation
costs
Acquisitionaccounting
unwind
Other Mar-20
13.3%
Capital generation offset by exceptional items & model updates
CET1 ratio evolution (bps)
Underlying capital generation 24bps
13.0%
No CET1 impact from COVID
charge after EEL offset and
IFRS9 transitional relief
20.1% Total capital ratio 19.5%
4.9% UK leverage ratio 4.9%
26.6% MREL ratio 25.6%
32
Outlook - guidance and targets
FY20 guidance Medium-term targets: too early to quantify COVID-19 impact
NIM
Underlying
costs
Dividend
155-160bps
<£920m
FY20 Board decision will reflect economic
environment at that time
• 75% mortgages
• 15% business
• 10% personal
• Above system asset growth
• High single digit CAGR in relationship deposits
• <115% loan-to-deposit ratio
Ambition for
asset mix in
medium term
>12%
Statutory RoTE
by FY22
CET1 generation
p.a. by FY22
ordinary dividend,
c.50% payout ratio
over time
• <30bps cost of risk to FY22
• c.13% CET1 ratio
• Sustainable returns
• c.£200m net cost savings by FY22
• <£780m costs in FY22
• Mid 40%’s cost: income ratio in FY22
>100bps
Progressive &
sustainable
Too early to determine what, if any, impact
on medium-term targets
Conclusion
Chief Executive Officer
DAVID DUFFY
33
34
Self-help strategy already in place… …with some H2 2020 re-phasing… …and strategic opportunities to consider
Self-help strategy re-phasing; strategic opportunities
Full launch of
Virgin Money
Current account
Further
optimisation
& efficiency
VM Business
Current Account
launch
Rebranding
activity
Re-phasing to create
capacity to support
customers and
protect capital
To disrupt the status quo
Making you happier about money
Pioneering
growth
Reshape balance sheet mix:
• grow margin accretive assets
• grow low cost relationship
deposits
Delighted
customers
and
colleagues
• Enhance the customer experience
• Drive digital adoption
• Colleagues delivering our purpose
Super
straightforward
efficiency
• Realise integration synergies
• Digitise and simplify the business
• Streamlined operating model
Discipline and
sustainability
• Foster a disciplined risk approach
• Optimise the Group’s RWAs
• Deliver sustainable returns
Delivered through our strategic priorities:
Our strategic ambition:
Our Purpose:
Emerging themes
• Importance of Purpose
and building trust
• Transforming customer
engagement: digital
servicing, lower cash
usage, further falls in
branch visits
• Colleague enablement:
enhanced remote
capability, greater
remote working
• Cost focus: physical
footprint, distribution
changes, shift to
variable
35
Well positioned for an uncertain outlook
Disciplined risk management approach• Loan portfolios prudently built to exacting standards
• Proactive management of customers & credit lines
Prudent funding and liquidity position• No reliance on short-term wholesale funding
• Prepared for 9-12 month shut-out of markets if need
• Excess liquidity being held; LCR of 139%
Resilient capital base• 13.0% CET1, with c.£800m management buffer to reg. min
• Substantial opportunities to improve capital resilience
Defensive balance sheet• Mortgages 82%; Business 11%; Personal 7%
• Significant on balance sheet provisions of £542m
Supportive Regulatory Environment
• Countercyclical buffer cut to 0%
• ACS stress test delayed
• IFRS9 & forbearance guidance
• TFSME launched
• Additional liquidity measures
• Additional QE increase to £645bn
Supportive Governmental Policies
• Bounce Back / CBILS / CLBILS loan
guarantee schemes
• Business rates relief
• Income support for individuals
• Income support for self employed
• Tax self-assessment delay
Protecting the bank and leveraging our strengths… …while making use of extensive policymaker support
Q&A
3636
Andrew Downey
Head of Investor Relations
Virgin Money UK PLC
t: +44 20 3216 2694
m: +44 7823 443 150
Investor Relations Contacts
37
Richard Smith
Senior Manager, Investor Relations
Virgin Money UK PLC
t: +44 20 3216 2665
m: +44 7483 399 303
Martin Pollard
Investor Relations Manager
Virgin Money UK PLC
t: +44 191 279 5780
m: +44 7894 814 195
Appendix
38
39
We are delivering the disruptive force in banking
✓ Full personal and
business offering
✓ Multi-product customers
✓ Primary relationships
✓ Digital capability and
Open Banking
✓ Trusted brand, loyal
customers
✓ Multiple distribution
channels
✓ Innovative brand & edge
✓ ‘Pay & play’
functionality
✓ Saving pots
functionality
✓ Customer lifestyle
intelligence
✓ Limited back-end legacy
systems
✓ Innovative digital
platform
40
• Signatory to U.N. Principles for Responsible Banking
• Developing a roadmap for net zero by 2030
• Developing demanding benchmarks for appraising businesses that are actively engaged in activities that advance the cause of environmental sustainability
• Targeting 5% of business loans to firms focused on activity promoting environmental sustainability
• Supporting vulnerable customers & financial inclusion via product development and service enhancements
• Supporter of HM Treasury’s Women in Finance Charter
• Achieved our target 40% women in senior management by 2020
• Senior leadership diversity and colleague engagement embedded in LTIP targets
• Two volunteering days per year for all colleagues
Progress continues on ESG performance
Sustainability commitments
✓ Net zero carbon emissions and waste impact targeted by 2030
✓ All directly purchased electricity is from renewable sources
✓ 80% in-house waste recycling with zero waste sent to landfill
✓ Identifying a partner to help build out sustainable loans framework
✓ Virgin Money Foundation donating >£850k to charities’ COVID efforts
✓ Virgin Money Giving platform fee waived; new partnerships and features
to enable fundraising from home
✓ 9k young people participated in “Make £5 Grow”, improving financial
well-being & entrepreneurship; Reworked for remote participation
✓ Supporting customers via affordable payroll-deducted loans in
partnership with Salary Finance
✓ >4k customers in financial difficulty supported through partnerships
✓ c.100 apprentices currently across the business
✓ 40% of senior management are female
✓ Quarterly Board update on Group sustainability strategy
✓ Transformation & Integration Committee established to oversee
strategic programmes
✓ Updated ESG focus aligned to Risk Committee principal risks
Environment
Social
Governance
41
Impairment economic scenarios
Scenario Economic Measure 2020 2021 2022 2023 2024
Existing multi-year
Severe Downside
GDP (yoy %) (1.2%) (1.1%) (0.5%) 0.8% 1.8%
Unemployment (average) 4.6% 5.6% 6.3% 6.4% 6.1%
House price growth (yoy %) (11.6%) (11.6%) (9.4%) 4.4% 4.5%
Pandemic Shock
GDP (yoy %) (10.0%) 2.8% 6.6% 2.6% 2.8%
Unemployment (average) 6.3% 8.4% 5.3% 4.4% 3.8%
House price growth (yoy %) (5.6%) (14.6%) (0.0%) 10.4% 13.3%
Source: Oxford Economics
42
at Mar 2020 at Sep 2019
Mortgages 59,521 60,079
Business 8,327 7,876
Personal 5,335 5,024
Total customer loans 73,183 72,979
Liquid assets and other 14,868 16,391
Other assets 2,003 1,629
Total assets 90,054 90,999
Customer deposits 64,652 63,787
Wholesale funding (excl. TFS) 9,693 11,164
TFS 7,142 7,342
Other liabilities 3,493 3,685
Total liabilities 84,980 85,978
Equity and reserves 5,074 5,021
Liabilities and equity 90,054 90,999
£m
Balance sheet
43
Strong growth in Personal relationship depositsGood growth in Business Current Accounts
Good growth in Relationship Deposits
Relationship deposit balances
£bn
Relationship deposit balances
£bn
6.9 7.3
2.2 2.1
Sep 19 Mar 20
8.0 8.3
4.3 4.5
Sep 19 Mar 20
Cost1 (bps) 33 33
Business Current Accounts BCA Linked Savings Personal Current Accounts PCA Linked Savings
30 32
9.1 9.4 12.3 12.9
3.9% 4.7%
Cost1 (bps)
1 Reflects cost of funds during the six month period
44
Mortgage Lending – H1 20
Mortgage lending location (1)
Loan-to-value of mortgage lending
Repayment and borrower profile
Gross new mortgage lending volumes
Scotland9%
England North14%
England Midlands
13%Greater London
29%
Rest of South32%
Other3%
OO - C/I68%
OO - I/O11%
BTL - I/O18%
BTL - C/I3%
<50%14%
50-80%56%
80-90%24%
>90%6%
4.8 3.7 3.3
0.9
0.80.8
5.7
4.5 4.1
H1 19 H2 19 H1 20
Broker Proprietary Channels
83%
(£bn)
Broker % total new business volume
(1) Excludes loans where data is not currently available due to front book data matching still to be completed and historic data capture requirements. Other
includes Wales, Northern Ireland, Channel Islands and those new accounts where the region might be unknown until collateral matching has occurred.
Stock of mortgage lending Gross new mortgage lending, H1 20
Gross new
mortgage
lending by LTV
banding
• 57.0% average LTV of stock mortgage portfolio
• 68.3% average LTV of gross new lending (H1 20)82%85%
45
Business Lending – H1 20
Business lending portfolio
Business lending portfolio by industry sector1
CRE: 7%
Housing
Associations:
4%
Retail & wholesale trade
10%
Business services
15%
Manufacturing
9%
Hospitality
7%
CRE
11%
Transport & storage
4%
Construction
2%
Other
10%
Entertainment
2%
Agriculture
17%
2 Fully secured
45%
Partially secured
21%
Largely/fully unsecured
34%
Gov’t, health & education
13%
1 Sector allocations per ONS Standard Industrial Classification (SIC) codes
2 Other includes Utilities, Post & Telecommunications, Personal Services, Finance and other unassigned businesses
Top 53% 6-20 largest
5%
Other92%
% of book by
customer exposure% of book by
collateral cover
1.1 1.3
H1 19 H1 20
(£bn) Business banking drawdowns
46
£m
Risk weighted assets
at Mar 2020 at Sep 2019
Mortgages 9,104 8,846
Business 7,580 7,124
Personal 4,238 4,042
Other 1,214 1,045
Total credit risk 22,136 21,057
Credit valuation adjustment 202 192
Operational risk 2,606 2,606
Counterparty risk 229 191
Total RWAs 25,173 24,046
Total loans 73,183 72,979
Credit RWAs / total loans 30% 29%
Total RWAs / assets 28% 26%
47
Interim MREL requirement met; on track for end-state Significant management buffer maintained
Robust capital position
£4.9bn
2020Interim MREL
18.00% of RWAs
£1.6bn
2022 Final MREL
2x(P1+P2A)
Mar-20 MREL Ratio MREL Requirements
c.£0.7bn
4.5%
2.9%
2.5%
13.0%
Minimum CET1 capitalrequirement
Management buffer Mar-20 CET1 ratio
9.9% c.£800m
£25.2bn of RWAs
CCB
Pillar 2A(1)
Pillar 1
• CET1 ratio in line with 13% target operating level
• Scope to further optimise capital requirements
• Robust capital position provides sufficient capacity to execute
CMD strategy and deliver our targets
(1) Incorporates perceived risks relating to the integration of the two businesses
(2) On 11 March 2020, as part of the package of measures to combat the COVID-19 virus, the FPC announced a reduction the UK CCyB to 0% with immediate effect.
The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest.
• 2020 interim MREL requirement met
• Final MREL dictated by Dec-21 Pillar 2A
• Planned issuance of £1.5-£2.0bn by Dec-21
25.6%
Total
Capital
Hold Co
Senior(2)
48
High quality liquid asset buffer… …and continue to hold excess liquidity
Strong liquidity position
Liquid Asset Portfolio (1)
(£bn)
• Additional liquidity held over Brexit and Part VII transfer
only partially released
• LCR of 139% well above regulatory requirement of 100%,
equivalent to a surplus of c.£2.9bn
• Continue to manage liquidity risk against an internal risk
appetite more prudent than regulatory requirements,
ensuring a substantial buffer in the event of any sudden
sharp outflows
(1) As at Mar-20
(2) Bonds issued by supra-nationals and AAA-rated covered bonds
7.56.0
1.1
1.1
2.9
3.3
Sep-19 Mar-20
11.410.3
Cash UK Government Securities Other Listed Bonds (2)
Key Ratios Mar-20 Sep-19
Liquidity Coverage Ratio 139% 152%
Net Stable Funding Ratio 129% 128%
49
…minimal residual 2020 funding needFull range of funding programmes…
Continued diversification of wholesale funding
42%
28%
11%
11%
4% 3% TFS
Securitisation
Covered Bond
Senior Unsecured
Subdebt
Due to Other Banks
3691,569
5,628
1,679
< 3mth 3mth - 1yrs 1yrs - 5yrs 5yrs +
Debt Securities in Issue by Maturity (1)
(£m)
96%4%
Wholesale Funding by Product (1)
(%)
(1) As at Mar-20
• Well managed wholesale maturity profile with <1 year
maturities representing 21% of total
• No reliance on short-term Wholesale Funding
• Expect initial allowance under the new TFSME to be
c.£7.0bn
– to be used to refinance outstanding £7.1bn of TFS
• Access to TFSME and deposit inflows leaves minimal
residual 2020 funding need:
– Will look to maintain access to Secured Funding
Markets in existing currencies; and
– Continue MREL build - planned issuance of £1.5-
£2.0bn by Dec-21
50(1) Long-term bank deposit rating
Credit Rating Product Programmes
Long-term Baa3 / Stable BBB- / NegativeBBB+ / Rating
Watch Negative
Senior Unsecured,
Subordinated DebtGMTN, A$ MTN
Short-term P-3 A-3 F2 - -
Long-term Baa1(1) / StableBBB+ /
Negative
A- / Rating Watch
Negative
Senior Unsecured, Covered
Bonds, RMBS
GMTN, A$MTN, RCB, Lanark,
Gosforth
Short-term P-2 A-2 F2 - -
Virgin Money UK PLC
Clydesdale Bank PLC
▪ On 8 November 2019, Moody’s changed the outlook on the UK to ‘Negative’ from ‘Stable’. Moody’s view is that UK institutions have weakened and the
UK’s economic and fiscal strength are likely to be weaker going forward. Subsequently, Moody’s took ratings action on 15 UK banks and building
societies, changing the outlook on the Group’s long-term ratings to ‘Stable’ from ‘Positive’.
▪ On 27 March 2020, Fitch downgraded the UK rating one notch to “AA-”, with ‘Negative’ outlook. The downgrade reflects the deep near-term damage to
the UK economy and significant weakening in the UK's public finances caused by the coronavirus outbreak, in addition to lingering Brexit uncertainty.
Subsequently, Fitch took ratings action on 18 UK banks and building societies, changing the outlook on VMUK and CB’s long-term ratings to ‘Rating
Watch Negative’ from ‘Stable’.
▪ On 17 January 2020, S&P changed the outlook on CB’s long-term rating from ‘Positive’ from ‘Stable’, reflecting the progress the Group has made in
raising additional loss-absorbing capital (“ALAC”) buffers. On 23 April 2020, S&P changed the outlook on VMUK and CB’s long-term ratings to
“Negative” (from “Stable and “Positive”, respectively), as part of a broader action on the European banking sector. The outlook revisions reflect their
view that the economic stress triggered by the coronavirus outbreak is likely to put pressure the Group's asset quality and earnings, and it may struggle
to maintain an ALAC ratio sustainably above 8% in 2020.
Credit Ratings reflect robust business model but macro uncertainty
51
Structural hedge & NII benefit
• Structural hedge used to minimise volatility and stabilise earnings on income related to low & non-interest bearing liabilities and
equity (as well as assets that display the same characteristics)
• Structural hedge of £23.9bn, or 26% as a percentage of balance sheet
• Structural products are hedged on a 5 year rolling basis, consistent with investment objectives to optimise and stabilise earnings as
the BoE Base Rate goes up and down. If balances remain stable, yield will eventually equal 5 year average of the 5 year swap rate
• Generated net interest income of £111m in H1 2020
6 months ended Mar-20 Sep-19
£mAverage
balanceYield (1) Net Interest
Income (2)
Average
balanceYield (1) Net Interest
Income (2)
NIBs 10,230 0.9% 48 10,130 1.0% 52
Administered Deposits 9,400 0.9% 45 9,300 0.9% 43
Equity & Other 4,222 0.9% 18 4,884 0.9% 23
Total 23,852 0.9% 111 24,314 1.0% 118
16% of NII
(1) Yield: Annualised Net Interest Income over Average Balance
(2) Net Interest Income: Average balance hedged over the period multiplied by the average yield on the fixed leg of the swap. Hedging may have been in the form of external swap execution
or use of internal offsetting exposures, so the yield is a proxy derived from income that was allocated to the products based on swap rates at the time the hedging requirement arose.
17% of NII
52
Disclaimer This document has been prepared by Virgin Money UK PLC (the “Company”) and is the responsibility of the Company. It was prepared for the purpose of, and comprises the written materials used in and/ or discussed at,
the presentation(s) given to stakeholders concerning the interim financial results of the Company and its subsidiaries (which together comprise the “Group”) for the six months ending 31 March 2020. This document is a
marketing communication and should not be regarded as a research recommendation.
The information in this document may include forward looking statements, which are based on assumptions, expectations, valuations, targets, estimates, forecasts and projections about future events. These can be
identified by the use of words such as 'expects', 'aims', 'targets', 'seeks', 'anticipates', 'plans', 'intends', 'prospects' 'outlooks', 'projects', ‘forecasts’, 'believes', 'estimates', 'potential', 'possible', and similar words or phrases.
These forward looking statements, as well as those included in any other material discussed at the presentation, are subject to risks, uncertainties and assumptions about the Group and its securities, investments and the
environment in which it operates, including, among other things, the development of its business and strategy, any acquisitions, combinations, disposals or other corporate activity undertaken by the Group (including but
not limited to the integration of the business of Virgin Money Holdings (UK) plc and its subsidiaries into the Group), trends in its operating industry, changes to customer behaviours and covenant, macroeconomic and/or
geopolitical factors, the repercussions of the outbreak of coronaviruses (including but not limited to the COVID-19 outbreak), changes to its board and/ or employee composition, exposures to terrorist activity, IT system
failures, cyber-crime, fraud and pension scheme liabilities, changes to law and/or the policies and practices of the Bank of England, the FCA and/or other regulatory and governmental bodies, inflation, deflation, interest
rates, exchange rates, changes in the liquidity, capital, funding and/ or asset position and/or credit ratings of the Group, future capital expenditures and acquisitions, the repercussions of the UK's referendum vote to leave
the European Union (EU), the UK’s exit from the EU (including any change to the UK’s currency), Eurozone instability, and any referendum on Scottish independence.
In light of these risks, uncertainties and assumptions, the events in the forward looking statements may not occur. Forward looking statements involve inherent risks and uncertainties. Other events not taken into account
may occur and may significantly affect the analysis of the forward looking statements. No member of the Group or their respective directors, officers, employees, agents, advisers or affiliates gives any assurance that any
such projections or estimates will be realised or that actual returns or other results will not be materially lower than those set out in this document and/or discussed at the presentation. All forward looking statements should
be viewed as hypothetical. No representation or warranty is made that any forward looking statement will come to pass. No member of the Group or their respective directors, officers, employees, agents, advisers or
affiliates undertakes any obligation to update or revise any such forward looking statement following the publication of this document nor accepts any responsibility, liability or duty of care whatsoever for (whether in
contract, tort or otherwise) or makes any representation or warranty, express or implied, as to the truth, fullness, fairness, merchantability, accuracy, sufficiency or completeness of, the information in this document or the
materials used in and/ or discussed at, the presentation.
Certain industry, market and competitive position data contained in this presentation comes from official or third party sources. There is no guarantee of the accuracy or completeness of such data. While the Company
reasonably believes that each of these publications, studies and surveys has been prepared by a reputable source, no member of the Group or their respective directors, officers, employees, agents, advisers or affiliates
have independently verified the data. In addition, certain of the industry, market and competitive position data contained in this presentation comes from the Group’s own internal research and estimates based on the
knowledge and experience of the Group’s management in the markets in which the Group operates. While the Company reasonably believes that such research and estimates are reasonable and reliable, they, and their
underlying methodology and assumptions, have not been verified by any independent source for accuracy or completeness, and are subject to change. Accordingly, undue reliance should not be placed on any of the
industry, market or competitive position data contained in this presentation.
The information, statements and opinions contained in this document and the materials used in and/ or discussed at, the presentation, do not constitute or form part of, and should not be construed as, any public offer
under any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.
The distribution of this document in certain jurisdictions may be restricted by law. Recipients are required by the Group to inform themselves about and to observe any such restrictions. No liability to any person is
accepted in relation to the distribution or possession of this document in any jurisdiction. The information, statements and opinions contained in this document and the materials used in and/ or discussed at, the
presentation are subject to change.
Certain figures contained in this document, including financial information, may have been subject to rounding adjustments and foreign exchange conversions. Accordingly, in certain instances, the sum or percentage
change of the numbers contained in this document may not conform exactly to the total figure given.
Making you happier about money